Cinda Securities: Innovation Transition from Follower to Leader, Industry Valuation Below Historical Average

Cinda Securities released a research report stating that the performance of sub-sectors in the biopharmaceutical industry diverged significantly in the first three quarters of 2025. The pressures from high base effects, centralized procurement, and anti-corruption measures have largely been absorbed. The sector's revenue and total profit growth showed a rebound after initial declines, with innovative drugs, CXO, and life science upstream segments experiencing a turnaround in market sentiment. Profitability stabilized, and the innovative drug sector benefited from BD expectations, driving a surge in the pharmaceutical index from the beginning of the year to July, followed by a period of consolidation. Overall, industry valuations remain below historical averages.

Key insights from Cinda Securities include:

1. **Innovative Drugs**: The first commercial insurance catalog for innovative drugs was implemented in 2025, potentially boosting payment volumes. China’s healthcare fund remained stable in 2024, with coverage exceeding 95%. The catalog prioritizes high innovation, significant clinical value, and patient benefits, including cutting-edge therapies like CAR-T and ADC. Overseas BD transactions have driven a revaluation of innovative drug assets, with China contributing about one-third of global R&D pipelines. Companies like Innovent Biologics and LianBio are key players in the IO 2.0 space.

2. **CXO**: Market supply-demand dynamics improved, with CDMOs expanding into emerging fields like ADC, peptides, and oligonucleotides. CROs are nearing an inflection point, with domestic demand recovering. WuXi AppTec, Pharmaron, and Porton Pharma Solutions are worth monitoring.

3. **Life Science Upstream**: Downstream demand rebounded, creating M&A opportunities. Overseas demand for innovative drugs recovered first, followed by domestic demand. Companies like BioDuro, Pharmaron, and Aladdin are well-positioned.

4. **AI Healthcare**: Policy support for "AI+" initiatives spurred applications in healthcare, with models like Deepseek driving advancements. JD Health and Medlive are notable players.

5. **High-End Medical Equipment**: Domestic procurement recovery, import substitution, and overseas expansion present growth opportunities. Companies such as United Imaging Healthcare, SonoScape, and Shanwaishan are leading the transition from catching up to leading.

6. **Orthopedic Implants**: The impact of centralized procurement has diminished, with robotics driving digital orthopedics. Aikang Medical and Chunli Medical are key beneficiaries.

7. **Traditional Chinese Medicine (TCM)**: Performance improved in Q3 2025, supported by seasonal flu trends and adjustments to the essential drug catalog. Valuations are below the five-year average, with Guangzhou Baiyunshan Pharmaceutical and Fangsheng Pharmaceutical as highlights.

**Risk Factors**: 1) Macroeconomic risks; 2) Underperformance in innovative drug R&D, commercialization, or BD deals; 3) Slow recovery in life science R&D demand or policy delays; 4) Intensified competition in AI healthcare and slower user growth; 5) Policy implementation delays or geopolitical risks affecting medical device exports; 6) TCM risks from aggressive procurement price cuts or weak sales.